Federal and state regulators are taking a closer look at how to regulate a fast-growing fintech field that connects workers with advances on their earnings.
So-called earned wage access products allow employees to obtain pay they have earned ahead of their regular payday. As the industry has grown, there has been an ongoing debate about whether the products should be considered extensions of credit, such as a loan, requiring standard disclosures and other protections.
The Consumer Financial Protection Bureau has signaled its interest. Tucked away in a recent announcement revoking a sandbox letter for EWA provider Payactiv was a warning that the agency might soon step in to provide more explicit edicts.
"The CFPB has received requests for clarification regarding its advisory opinion on 'earned wage access' products," the agency said in a June 30 release. "The CFPB plans to issue further guidance soon to provide greater clarity concerning the application of the definition of 'credit' under the Truth in Lending Act and Regulation Z."
A borrower or a lender?
The termination of Payactiv's sandbox letter, which gave the company regulatory protection from key lending rules, came at the company's request. The firm said it wanted to make changes to its business strategy without incurring a lengthy review from the CFPB, though the CFPB had already told Payactiv it was considering terminating the letter as a result of public statements from the company “wrongly suggesting a CFPB endorsement.”
A press release and a couple of blog posts by Payactiv referencing the CFPB now return errors or redirect to Payactiv’s homepage.
Aside from that dust-up, the line about greater clarity captured the attention of consumer advocates, who have been pushing for changes to a Trump-era advisory opinion that stated that EWA products are not loans or credit if they meet certain criteria, including that no fee is charged.
"Clearly, more is coming from the CFPB," said Lauren Saunders, associate director at the National Consumer Law Center, which believes generally that earned wage access products should be regulated as loans.
Consumer groups such as the NCLC have warned about the products potentially harming users by “adding extra fees in people’s budget every few weeks for no additional liquidity,” Saunders said.
Industry officials say the products are a cheaper alternative to payday loans for customers in a cash crunch. Earned wage access "encourages competition, which I think everyone wants from the industry side and the agency side," said Brian Tate, president of the Innovative Payments Association, which represents some EWA providers. Some employers see faster pay options as a recruitment tool.
Earned wage products are growing quickly. The research firm Aite-Novarica Group estimated that industry providers moved about $9.5 billion in pay in 2020. While the firm has not released updated figures, the number has grown significantly since then, according to Francisco Alvarez-Evangelista, an adviser with Aite-Novarica.
"The fact that pay has been constricted to only a couple of dozen times a year for decades has created this opportunity for financial technology providers to help solve some of those gaps," Alvarez-Evangelista said.
The CFPB has provided only limited guidance on how to classify the products through a November 2020 advisory opinion. The opinion stated that employer-based earned wage access programs do not qualify as loans or credit so long as the “employee makes no payment, voluntary or otherwise, to access EWA funds,” among other criteria. Before that, then-CFPB Director Richard Cordray exempted employer-based earned wage access products from a 2016 rule on payday loans.
Consumer groups asked the CFPB to review the 2020 advisory last fall, saying that its definition of credit under the Truth in Lending Act could be used to justify classifying a wider range of EWA products as non-loans, including in states considering their own laws.
Advocates fear that the fees of earned wage access could add up quickly for frequent users and therefore the same guardrails that govern most loans are needed. “If we accept the argument that these are not loans, those fees may go up once they have solid exemptions from lending laws," Saunders said.
A question of who’s paying
The total fees that users pay on average are difficult to compare without mandated data reporting. But researchers from the University of Houston Law Center wrote in a 2020 analysis of some fee models that “if employees are choosing between a payday loan that will cost $45 in fees and an earned wage access product that will cost $5, it appears an easy choice.”
“With some payday loans, you do the math, and you end up with a 360%, 400% APR — that’s what we’re trying to avoid,” said Nico Simko, co-founder of the on-demand payment startup Clair. “The purpose of regulation is to do what’s best for consumers, so regulators need to be sure, are we fighting the right guys here?”
Part of the challenge in setting rules is that business models in the industry vary significantly. Some partner with employers, with those businesses in some instances paying fees, while others offer an advance directly to workers.
The CFPB’s previous guidance has focused on employer-based programs. But MoneyLion, which markets an early-access product to consumers, said it would encourage the CFPB to take a “business-model-agnostic approach” said Matthew Kellogg, VP of government affairs and communications. The company says that a direct-to-consumer model like its own allows it to serve workers excluded from services that go through employers, like some independent contractors. The company also feels “strongly that there should be a free pathway for the products.”
Firms that partner with employers, however, believe they offer a more straightforward regulatory case. “Employer-integrated services have several levels of built-in consumer protections, and services without those protections can pose different and more difficult policy and regulatory issues," said Matt Kopko, vice president of public policy at DailyPay.
The Golden State standard
Since early wage access involves pay, state wage and hour laws could shape which products are offered. New Jersey, New York, South Carolina, Georgia, Utah, Nevada and North Carolina have each considered regulatory frameworks for the products.
Some within the industry have offered support for California's approach. In February, the state's Department of Financial Protection and Innovation issued a declaration that employer-based EWA provider FlexWage is not subject to licensing under its lending and deferred-deposit laws. The company requested the legal review.
The review set two standards to guide the designation that the product is not a loan: Employers provided funds in amounts that did not exceed earned but unpaid wages, and the fees charged by FlexWage did not suggest the product was designed to evade California’s lending laws. The regulator has also opened a rule-making process for the industry.
Since the CFPB terminated Payactiv’s sandbox letter, the earned wage access company remains committed to pursuing a “collaborative relationship” with the federal agency, said Government Affairs Vice President Molly Jones.
The CFPB declined to comment on when it might release further guidance or how it is engaging stakeholders on the issue.
New regulation may not be a bad thing for the industry.
"The main issue, regardless of which side you are on, is there is a lack of clarity," said Moorari Shah, a partner with the law firm Sheppard Mullin. "The regulators, the industry, the employers all acknowledge it: It is unclear how this should be treated."